Business Day
4 March 2010
Jonathan Yudelowitz

The lavish profits achieved by the global financial services industry were touted as the result of a new, technology-enabled, superior capitalism; but it was more like socialism - and much of it collapsed with similar speed and drama.

States bailed out the banks and the system's protagonists manipulated the facts to suit their agendas, neither learning from mistakes, nor questioning assumptions.  Wall Street and the City of London relied on illusions of success; balance sheets propped up by collateralised debt obligations (CDOs) and risks hived off into special purpose vehicles - all unsustainable.

The vogue was, and is, an "only manage what you can measure", hyperrational form of management which engineers flat, lean business organisations that categorise reality according to preconceptions, prizing only what produces quantifiable value and outsourcing or discarding the rest.

People believed risks had been neutralised, just because they were bought by venerated Wall Street firms in the form of CDOs.  Astonishingly, these instruments were given unequivocal AAA ratings by Fitch Ratings, Moody's Investors Service and Standard & Poor's, who told the banks what they wanted to hear, rather than the truth. 

Information and communication technology (ICT) has begun replacing real human interaction and conversation with ersatz electronic equivalents.  This distorts rather than clarifies intention and lacks specific context and other sources of meaning that are vital to effective decisions. 

Unlike human beings, computer programmes such as those that neatly calculated the CDOs cannot feel sceptical, interested or uncomfortable.  Nor can they assuage or confirm their doubt, validate or change their points of view by discussing them with others and listening to fresh facts and opinions.  Consequently, their clever mathematics could not tell whether or not the mortgages on which they were based could ever be paid back.  What seemed like investment was actually gambling. 

Perhaps if they had not "bought" the ICT hubris, banking executives might have trusted their own sense of things and investigated what seemed fishy.

If they hadn't been so vain and sure of themselves they might have heeded the warning signals right under their noses.  For example, "... builders constructing houses for which there was no demand; mortgage lenders foisting costly subprime loans on the cash-strapped and elderly; Wall Street banks leveraging up their equity capital 40 to one", according to a New Yorker feature in October last year. 

Investment bankers should be generously rewarded for devising and executing ingenious deals that keep the wheels of capitalism turning.  But they must also be held responsible for the long-term financial and social effects of their deals. 

They must not allow themselves to be seduced by the notion of becoming financially independent at somebody else's cost.

As the world's economy revives, bankers are paying themselves big bonuses again.  Regulators who lack essential insider knowledge necessary to understand the workings of an industry are reacting with increasingly sophisticated rules, arrogantly believing that they can foresee any situation that may occur in the future.  Like the Sarbanes-Oxley Act implemented after Enron, they tie business up in red tape, to the benefit only of lawyers and auditors. 

It's hard to blame them, but the approach obscures the fact that what is really needed is leadership: a blend of conviction, duty, confidence and humility.  Banking executives should not only be responsible for profits in the short term, but also encouraged to think beyond reporting deadlines. 

This demands they earn big salaries, which are not directly linked to immediate results, that they focus not only on what is measurable, but invest in sustainable cultures and strategies too. 

This may bring reflection, learning and responsibility into the business culture that has been so dangerously missing up to now.